Wednesday, November 21, 2007

FACTS AND WAYS OF AVOIDING CORRUPTION IN FOREIGN FUNDED PROJECTS

The media is hot on the issue of corruption these days, especially after the World Bank (WB) canceled a huge Philippine Infrastructure loan. The WB blames corruption in the Philippines while the Philippine government says it's totally out of their hands and it is WB who supposedly runs the projects.

Listening to the radio and reading the papers, I realized that the media and a lot of our politicians are very much in the dark regarding the facts behind government projects that are funded by foreign loans.

In my opinion, the RP government is not entirely being truthful...

Are we to believe that the government is powerless to stop an overpriced project? They are the ones to pay for it and therefore, it is their responsibility to safeguard the entire process. They should have detected overpricing, based on their experiences (in building roads and bridges in the country). Therefore, they should have stepped in and told the WB, "That is an over priced bid. Approve it and we will not pay for it!"

LOAN FUNDED PROJECTS

It is true that a lot of foreign funded projects in this country are played based on the creditors’ rules and the saying, “Beggars can’t be choosers very much apply”. While I don’t think such is necessary, we have grown so accustomed to that kind of set up that it has become a hard habit to break.

At present, our government projects funded by foreign loans are implemented under strict supervision and that is probably the reason why gross overpricing was detected. The way things are done, every supplier’s and contractor’s bid is scrutinized by the lending agency concerned. Bidders prepare 3 ~ 4 copies of their tender proposals (bid forms), a copy of which automatically goes to the representatives of the lending agencies.

Projects funded by the IMF/WB/ADB and those financed by specific countries mainly differ in the following areas:

In IMF/WB/ADB Projects, suppliers and contractors that are allowed to participate should come from IMF, WB or ADB member countries.

Loans funded by Specific governments usually stipulate that suppliers and contractors should come from the lender’s country.

WHERE DOES CORRUPTION POSSIBLY COME IN?

The Philippine government has a Commission On Audit (COA) which analyzes project costs. A grossly overpriced project that passes their scrutiny opens the gateway to a lot of doubts.

Under both schemes, contractors can collude and fix the minimum bid prices.

All types of foreign loans need to get the approval of the Philippine government. Therefore, the contractor most confident of bagging the contract can try to offer bribes to the approving agencies (remember Sec Neri?).

The Philippine government (usually DPWH) will need to inspect and approve the completed infrastructures. Substandard workmanship can be rejected and even properly constructed buildings can be placed on hold for a long time. Such a situation provides the avenue for corruption since contractors pay up in order to get approvals and receive their payments.

I believe that contractors find it easier to substantially overprice their bids in projects funded by specific countries s. Under WB/IMF/ADB, there are a number of qualified bidders, making it difficult for anybody to get a consensus to fix prices. Projects funded by specific governments, on the other hand, involve only a few players. The ZTE Broadband deal for instance, involved only the lending agency and the contractor on the Chinese side and the Philippine government on the other. It was easier for ZTE to have manipulated the prices and silenced any opposition from China since it is their side which will benefited, anyway. They will get all the jobs with a handful of Filipinos as subcontractors while the Philippine government will be the ones to pay the bill.

REMEDY:

In order to prevent the occurrence of similar problems, I believe that lending agencies should:

Eliminate the provision that narrows down the list of approved bidders.

Limit their involvement to finance and quality control, through 3rd party consultants like SGS, Bureau Veritas (BV), etc.

The SGS knows the price of virtually all commodities in the world and estimating project costs should be easy for them. Their estimates may then be used as the basis for approving the loan amounts. That way, overpricing of bids will effectively be controlled.

Quality standards company BV, on the other hand, can monitor the bidding process and approve the release of final payments. In my opinion, agencies like SGS and BV are more difficult to influence and manipulate (than any government).